Brexit vote fallout a longer term risk for NZ

The impact of Britain's decision to leave the European Union has so far had only a modest impact on commodities prices, but the fallout from the vote poses risks to New Zealand agriculture in the medium to long term, ASB rural economist Nathan Penny said.

Financial markets wilted in the aftermath of Britain's surprise "Brexit" vote. Currency markets have remained volatile, world interest rates have fallen but equities markets have shown signs of stabilising.

There remains the likelihood of more political instability in the UK following Brexit advocate Boris Johnson's decision to remove himself from contention for the Conservative Party's leadership, following on from Prime Minister David Cameron's announcement that he would step down.

Despite the broader market reaction to Brexit, the impact on agricultural markets has been modest and commodities futures prices are only down slightly, Penny said in a commentary.

"That said, the fallout from Brexit poses risks to New Zealand agriculture in the medium to long term.

"The slowdown in the UK/EU's economic growth may flow on to the rest of the world, especially in the event of recession.

"If this reaches the food markets of more significance to New Zealand, such as China and the US, downturns in demand may affect New Zealand commodity prices," he said.

The United Kingdom receives around 5 per cent of New Zealand's total exports but the lamb and wine markets may be hit harder since they rely more heavily on the UK for exports than other sectors.

Britain is responsible for about one fifth of the New Zealand lamb export trade by value, and the UK takes about one quarter of New Zealand's wine exports by volume.

These exports are likely to see lower UK prices as demand falls, Penny said.

"Indeed, the lower pound will decrease the spending power of UK consumers and at the same time make local produce relatively cheap, while a slowing UK economy is likely to decrease demand further," he said.

For dairy, he did not expect Brexit to change the fundamental supply issues facing that market.

"Our view is predicated on a supply response from producers, and we don't expect Brexit to reverse the fall in production here in New Zealand or in the EU."

Penny said European dairy production, a seasonally adjusted basis, was already coming off and Brexit would not change that dynamic. Production in New Zealand and Australia is also falling.

A decline in the lamb market would raise the question as to how much slack the rest of the market can pick up. In the wine trade, a decline was likely to be partly offset by strong demand from the United States.

Penny, one of the more optimistic of rural economists when it comes to milk price forecasts, expects Fonterra's farmgate milk price to come to $6 a kg by the year's end, compared with the co-operative's current forecast of $4.75/kg.

For this week's GlobalDairyTrade auction, Penny said was possible that buyers could take to the sidelines because of the uncertainty caused by Brexit, but he did not expect them to remain there for long.

Despite all the fears about an El Nino-induced drought and a big increase in annual cow cull, New Zealand milk production fell by only 1.6 per cent in the 2015/6 year, according to Dairy Companies Association of NZ data.

For the month of May, milk production was up by 3.5 per cent, or 2.5 per cent on a milksolids basis, compared with May last year.

This domestic spring would be an important guideline, production-wise, for how the rest of the season pans out, Penny said.